Business Accounting 1

INTRODUCTION TO THE
ACCOUNTING WORLD

1
 Nature of a Business

• A business is an organization in which basic resources (inputs)

such as building, machine, equipment, materials and labor, are
assembled and processed to provide goods or services
(outputs).

• The objective of most businesses is to make profits and

increase the wealth of its owner(s)

• Types of businesses organization:

- Sole proprietor
- Partnership
- Corporation (Sdn Bhd or Bhd)
2
Types of Business Units

3
Key Objective of Financial Accounting

What is financial accounting?

- Financial Accounting is a process involving
identifying, measuring, recording (including
classifying, summarizing), and communicating
business transactions and accounting reports.

Who are interested (or users)?

- Owner(s) , Lenders , Creditors, Employees and
management, Government
4
Key Objective of Financial Accounting

Why?
- Provide useful financial information to various
users, especially owner(s), lenders and creditors, to
help them to make economic decisions and / or
take necessary actions.

5
 Key Objective of Financial Accounting

What information?
- Financial position of an entity at a certain date. It is
about assets owned and liabilities owed by an entity.
Eg, Assets and Liabilities as at 31 Dec 2015
- Performance (Profit or Loss) of an entity for a period
of time. It is about revenues and expenses of an entity.
Eg, Profit or Loss for the year ended 31 Dec 2015
- Cash flows of an entity for a period of time.

6
 Business Transactions
What to record?
A business event or activity that affects the financial
position (assets and liabilities) of an entity.
Eg,
- Brought in cash $100,000 as Capital
- Used cash $10,000 to buy Machine
- Sold goods cost $100 at the price of $140
- Purchase of goods $500 on credit term

7
 Fundamental Accounting Concept

Accounting concepts are:

Business entity concept.
Dual aspect concept.
Going concern concept.
Time interval concept.
Monetary concept/money measurement concept.
Historical (cost) concept/cost concept.
Matching concept.
Accrual concept.
Prudence or Conservatism Convention
Consistency Concept

8
 Business Entity Concept
• Business entity is separate from its owner;
• Treat business entity as a ‘Person’.
• Records transactions from a business entity
viewpoint.
• Hence, transactions that are not related to a
business entity is not recorded or ignored.

9
 Dual Aspect Concept
• This is the basic principle of accounting.
• All business events/transactions are regarded as
having a dual aspect that is twofold effect.
• Each receiver is also a giver, and every giver is
also a receiver.
• Example 1: Mr A purchases furniture for cash
RM1,000, he receives furniture on one hand, and
pays RM1,000 on the other. Thus the twofold
effect is
– Increase in one asset that is furniture.
– Decrease in other asset that is cash.

10
 Going Concern Concept
• A going concern is defined as “any enterprise
which is expected to continue operating
indefinitely in the future.”
• Significant of this concept:
– Financial statements are prepared on the basis of this
concept.
– Continuity of business activities are ensured to
outsiders over an indefinite period of time.
– The fluctuations in the market value of fixed assets is
not taken into account.
– On the basis of this concept, a business is judged for
its capacity to earn profits in future.
11
 Time Interval Concept
• Since life of business is assumed to be indefinite,
the measurement of income according to this
concept is not possible for a very long period.
• The proprietor of the business cannot wait for
such a long period.
• Therefore accountants choose some shorter and
convenient time for the measurement of income.
• Twelve months period is normally adopted for
this purpose.
• This time interval is called accounting period.

12
 Monetary Concept/Money
Measurement Concept
• Every transaction is recorded in terms of money.
• A fact or happening which cannot be expressed in
terms of money is not recorded in the account
books.
• Example, general health condition of the
chairman of the company, quality of products,
sales policy pursued by the company, general
working conditions of a worker etc, cannot be
expressed in terms of money.
13
 Historical (Cost) Concept/Cost
Concept
• Asset is recorded at the price paid to acquire it –
that is at cost.
• This cost is the basis for all subsequent
accounting for the asset.
• This cost price at the time of purchase is
systematically reduced by the process called
depreciation.
• e.g. Purchased a machine 5 years ago at RM1
million for office use . The machine is reflected in
the accounts at RM1 million, even though the
current market value is RM3 million.
14
 Matching Concept
• All expenses incurred in an accounting year
are compared with the revenues during that
year.
• For this we have to recognise the revenues or
inflow during an accounting period and the
expenses incurred in securing those inflows.
• Net income is arrived at by applying the
formula
Net income = Revenues – Expenses
15
 Accrual Concept
• The term “accrual” means “something that becomes
due especially an amount of money that is yet to be
paid or received at the end of the accounting period”.
• Revenue is realised at the time of sale of goods or
services irrespective of when the cash is received.
• The financial statements will not reveal true and fair
view of the affair of a business unit, unless all the
transactions or events of the concerned year are
brought into the books of accounts.
• Expenses are recognised at the time the services are
received irrespective of when actual payment for the
service is made.

16
 Prudence Concepts/Conventions
• In the event of uncertainties, takes into account
expected losses and do not expected gains. The
accountant will always choose the alternative which
gives a lower profit or lower asset value.
• Underestimate revenue and overestimate expenses
• Eg, make allowance for doubtful debts for debtors
outstanding at the year end

17
 Consistency Concept
• accounting methods once adopted must be
applied consistently in future
• Also same methods and techniques must be
used for similar situations.
• a business must refrain from changing its
accounting policy unless on reasonable
grounds

18
 Accounting Cycle
Steps 1-3 Daily, Steps 4-7 Month-end / Year-end, Steps
7-1, Next Accounting period

19